ACT Energy Technologies Ltd. press release
Cathedral Energy Services Ltd. (the "Company" or "Cathedral" / TSX: CET) announces its consolidated financial results for the three months ended March 31, 2023 and 2022
TSX - Toronto Stock Exchange · Canada
Canada NewsWire
/NOT FOR DISSEMINATION IN THE UNITED STATES OF AMERICA /
CALGARY, AB , May 11, 2023 /CNW/ -
This news release contains "forward-looking statements" within the meaning of applicable Canadian securities laws. For a full disclosure of forward-looking statements and the risks to which they are subject, see the "Forward-Looking Statements" section in this news release. This news release contains references to Adjusted gross margin, Adjusted gross margin %, Adjusted EBITDAS, Adjusted EBITDAS margin % and Free cash flow. These terms do not have standardized meanings prescribed under International Financial Reporting Standards ("IFRS") and may not be comparable to similar measures used by other companies. See the "Non-GAAP Measures" section in this news release for definitions and tabular calculations.
FINANCIAL HIGHLIGHTS
Canadian dollars in 000's except for otherwise noted
| | Three months ended March 31, | | | | 2023 | 2022 | | | | | | Revenues | $ 127,665 | $ 34,385 | | Gross margin % | 13 % | 16 % | | Adjusted gross margin % (1) | 21 % | 29 % | | Adjusted EBITDAS (1) | $ 15,187 | $ 6,944 | | Adjusted EBITDAS margin % (1) | 12 % | 20 % | | Cash flow provided by (used in) operating activities | $ 23,916 | $ (1,758) | | Free cash flow (deficit) (1) | $ (699) | $ 2,841 | | Net income | $ 794 | $ 2,243 | | Per share - basic | $ — | $ 0.02 | | Per share - diluted | $ — | $ 0.02 | | Weighted average shares outstanding: | | | | Basic (000s) | 224,561 | 91,297 | | Diluted (000s) | 236,386 | 93,516 |
| As at | March 31, 2023 | December 31, 2022 | | | | | | Working capital, excluding current portion of loans and borrowings | $ 58,485 | $ 60,447 | | Total assets | $ 351,324 | $ 353,990 | | Loans and borrowings | $ 76,807 | $ 80,535 | | Shareholders' equity | $ 156,073 | $ 153,897 | | (1) Refer to the "Non-GAAP Measures" section | | |
2023 Q1 KEY TAKEAWAYS
The Company achieved the following 2023 Q1 results and highlights:
Revenue of $127,665 in 2023 Q1, an increase of 271%, compared to $34,385 in 2022 Q1. Adjusted EBITDAS of $15,187 in 2023 Q1, an increase of 119%, compared to $6,944 in 2022 Q1. Canadian directional drilling market share averaged 25.3% in 2023 Q1, an increase from 19.9% in 2022 Q1. Loans and borrowings less cash of $57,719 as at March 31, 2023 , compared to $69,360 as at December 31, 2022 . The Company received $16,012 in cumulative warrant exercise proceeds by the warrant expiry date of April 25, 2023 , which accounted for 99.7% of eligible warrants. Cathedral used the proceeds realized in April 2023 to pay off the $13,000 owing on its Syndicated Operating Facility. Margins in the quarter relative to the prior year were primarily impacted by higher direct costs related to labour, repair and maintenance and third-party equipment rental costs, offset by lower fixed costs as a percentage of revenue, with these costs expected to normalize moving forward. The Company remains proactive in regards to its capital budget with the ability to increase or decrease expenditures in response to changing market conditions, including commodity prices which generally drive activity levels. While the Company remains constructive on the outlook for 2023, particularly the second half of the year, the Company is reducing its net capital budget to $36,000 for 2023 versus the $46,000 previously announced.
United States
Job count remained flat to 2022 Q4. Pricing was flat to 2022 Q4 albeit with a higher proportion of lower revenue conventional work. A higher percentage of conventional work reduced average base day rates by approximately two thousand dollars per day. Lower revenue rates temporarily compressed margins as the Company continues to rent third-party Measurement-While-Drilling ("MWD") technology. The mix of higher revenue Rotary Steerable ("RSS") work returned to 2022 Q4 averages by March 2023 . 2023 Q2 job count has increased to over sixty, up from a range of fifty-two to fifty-four earlier in 2023 Q1. Bookings and activity in 2023 Q2 and the second half of the year continue to solidify and steadily increase. While Discovery Downhole Services ("Discovery") had marginally lower utilization in the first quarter of 2023, utilization levels in the second quarter of 2023 have recovered to similar levels achieved in 2022 Q4.
Canada
Day rates increased to $12,392 per day from $11,798 per day in 2022 Q4. Peaking at sixty-two jobs, we were one of the most active directional drilling providers in the quarter. Equipment acquired through our consolidation activity provided spare capacity to meet increased customer demand and activity levels. Reactivating equipment to meet increased demand resulted in a temporary increase in repair costs compared to historical levels and reduced margins by approximately 3% from both 2022 Q1 and 2022 Q4. The motor reactivation completed in 2023 Q1 will reduce capital requirements and improve margins in the second half of the year as we replace rentals and return to a more consistent level of repairs through the remainder of the year. We anticipate activity levels rebounding from seasonal spring lows in late-May to early-June and building to levels as strong or stronger than those experienced in 2022 Q3.
PRESIDENT'S MESSAGE
Comments from President & CEO Tom Connors :
We experienced different dynamics in each major market in North America during the first quarter of 2023. In the U.S., pricing and activity remained flat while the market experienced some moderation in overall industry activity, leading to a lower revenue mix. Canada experienced robust activity with temporarily higher levels of repair work to meet increased demand. Canadian directional drilling revenue registered its highest level ever due to a combination of: acquisitions over the last year; strong client retention and continued high Canadian market share; pricing increases on a year-over-year and sequential quarterly basis; and strong overall exploration and production ("E&P") company spending levels in the Western Canadian Sedimentary Basin. U.S. results were also up substantially year-over-year, due to the acquisition of Altitude Energy Partners ("Altitude") in mid-summer 2022.
With zero excess rental capacity in the market and near record levels of activity in Canada for Cathedral, we were fortunate to have added equipment through acquisitions to meet the increased demand. In order to meet the increased demand for motors, the Company reactivated a number of motors for a fraction of the cost of purchasing new equipment. The expense of reactivating such motors did result in an increase in repair costs in the quarter. Correspondingly, the increase in the active motor fleet will reduce the requirement for capital to purchase new equipment moving forward and should offset rental costs and improve margins through the remainder of the year. Although the reactivation effort did push our repair costs higher than in 2022 Q1, the trend of higher repairs and lower margins in the first half of the year, followed by lower repairs with higher margins in the second half of the year is consistent with historical trends. As such, we anticipate that margins over the twelve-month period of 2023 will look consistent, if not slightly improved, from 2022. Pricing also increased approximately $500 per day in 2023 Q1 versus 2022 Q4 and the Company anticipates levels will remain somewhat steady for the next couple of quarters.
In the U.S. directional business, prices and activity remained flat from 2022 Q4, but overall revenue rates per day decreased approximately two thousand dollars per day due to a higher mix of conventional work versus rotary steerable work in the quarter. The reduction of revenue, due to altered work mix, temporarily impacted margins in the first two months of the year, and was exacerbated by the necessity to rent third-party MWD technology on almost every job. Cathedral is actively pursuing options to supply our own MWD platform to potentially capture an organic growth opportunity that would lead to an improvement in margins and a commensurate expansion in EBITDAS. Rig-counts moderated somewhat in the quarter, down by approximately 4%. Despite the fact that there were some rig reductions and changes to drilling programs, our U.S. Altitude team nimbly filled the work with other customers, so much so, that the number of U.S. operating days actually increased 3.5% vs 2022 Q4 levels.
Our focus on performance and delivering value to our customers has delivered a steady increase in job count through the end of March and into April, resulting in over sixty jobs per day currently for Altitude, marking a return to levels of rotary steerable utilization consistent with 2022 Q4. The outlook for activity for the remainder of the year is expected to remain stable from the levels accomplished in Q2 or build slightly from those levels in the back half of the year based on current visibility.
Our mud motor rental business, Discovery, experienced a slight decline in rental utilization, consistent with the rest of the market but, as of today, has returned to utilization levels experienced in 2022 Q4. Mud motor rental utilization is expected to remain steady in the near-term with an increase in the second half of the year, as we take delivery of the latest generation of higher demand motor technology, that is part of our planned 2023 capital program.
The combination of seven different acquisitions over an eighteen-month period continues to deliver increased market share, EBITDAS, and free cash flow for Cathedral as we differentiate ourselves with a much stronger, unified, and highly competent team. Cathedral remains steadfast in its efforts to continue to grow the business by offering exceptional value and excellence to our customers. Virtually all of the key personnel added through the acquisitions remain with the Company, which is a direct benefit of our acquisition structure that aligns our partners to existing shareholders with equity in the Company. This alignment has resulted in a larger, combined team with no loss of any customers or market share related to acquisition integration. We continue to focus on building out the strength of Cathedral by employing a guiding philosophy that we will incorporate and learn from the best of each business we have purchased. On that basis, we have been able to improve efficiencies, best practices, and systems more rapidly than might otherwise have been possible on our own.
The strength of our free cash flow profile, achieved through the acquisitions, has proven powerful. Cathedral's loans and borrowings less cash position at June 30, 2022 proforma the close of the Altitude acquisition in July 2022 of approximately $79,447 has decreased to $57,719 in only nine months to the end of 2023 Q1. Additionally, in April 2023 , the balance sheet was further strengthened with the cumulative exercise of 99.7% of the warrants from the $26,451 bought deal financing completed in April 2022 . Of this amount, 88.6% of the warrants were exercised in April 2023 , further demonstrating clear shareholder support and confidence in our plan going forward.
2022 ACQUISITIONS
In 2022, the Company executed five strategic acquisitions as detailed below:
U.S.- based company, Altitude in July 2022 for total consideration of $124,112 , comprised of a cash payment of $87,245 and a common share issuance of $36,867 , with the purchase price allocated primarily to working capital, property, plant and equipment, intangible assets and goodwill; U.S.- based operations, Discovery in February 2022 for total consideration of $20,892 , comprised of a cash payment of $18,160 and a common share issuance of $2,732 , with the purchase price allocated primarily to inventory and property, plant and equipment; LEXA Drilling Technologies Inc. ("Lexa") in June 2022 for total consideration of $1,761 in exchange for intangible assets; Compass Directional Services ("Compass") in June 2022 for total consideration of $8,315 , comprised of a cash payment of $4,000 and a common share issuance of $4,315 , with the purchase price allocated primarily to inventory and property, plant and equipment; and the Canadian directional drilling business of Ensign Energy Services ("Ensign") in October 2022 for total common share consideration of $5,965 with the purchase price allocated primarily to inventory and property, plant and equipment.
In addition to the assets acquired as described above, there were certain other minor working capital, right-of-use assets and lease liabilities, and deferred tax liabilities recognized as part of the purchase price allocations.
RESULTS OF OPERATIONS
| | Three months ended March 31, | | | | 2023 | 2022 | | | | | | Revenues | | | | Canada | $ 45,344 | $ 25,399 | | United States | 82,321 | 8,986 | | Total revenues | 127,665 | 34,385 | | Cost of sales: | | | | Direct costs | (101,232) | (24,524) | | Depreciation and amortization | (9,225) | (4,289) | | Share-based compensation | (144) | (43) | | Cost of sales | (110,601) | (28,856) | | | | | | Gross margin | $ 17,064 | $ 5,529 | | | | | | Gross margin % | 13 % | 16 % | | Adjusted gross margin % (1) | 21 % | 29 % | | (1) Refer to the "Non-GAAP Measures" section. | | |
The Company recognized $127,665 of revenues in 2023 Q1, an increase of $93,280 or 271%, compared to $34,385 in 2022 Q1 and cost of sales of $110,601 in 2023 Q1, an increase of $81,745 or 283%, compared to $28,856 in 2022 Q1.
As a result, the Gross margin % and Adjusted gross margin % decreased to 13% and 21% in 2023 Q1, compared to 16% and 29% in 2022 Q1, respectively. Margins in the quarter relative to the prior year were primarily impacted by higher direct costs related to labour, repair and maintenance and third-party equipment rental costs, offset by lower fixed costs as a percentage of revenue, with these costs expected to normalize moving forward.
Consolidated depreciation and amortization expense allocated to cost of sales increased to $9,225 in 2023 Q1, compared to $4,289 in 2022 Q1 due to property, plant and equipment additions, including those related to the 2022 acquisitions. Depreciation and amortization expense included in cost of sales as a percentage of revenue was 7% for 2023 Q1 and 12% in 2022 Q1.
Canadian segment
Canadian revenues were $45,344 in 2023 Q1, an increase of $19,945 or 79%, compared to $25,399 in 2022 Q1, mainly due to acquisitions completed in 2022, including Compass and Ensign. The increase was the result of: i) a 37% increase in activity days to 3,659 days in 2023 Q1, compared to 2,670 days in 2022 Q1, and ii) a 30% increase in the average day rate to $12,392 per day in 2023 Q1, compared to $9,513 per day in 2022 Q1.
Based on publicly disclosed Canadian drilling activity, Cathedral's Canadian market share in 2023 Q1 was 25.3%, compared to 19.9% for 2022 Q1.
Canadian direct costs were $34,729 in 2023 Q1, an increase of $16,199 or 87%, compared to $18,529 in 2022 Q1. The increase is mainly due to higher costs related to the 2022 acquisitions. As a percentage of revenues, direct costs also increased to 77% in 2023 Q1 from 73% in 2022 Q1, mainly due to higher repair and maintenance and other minor costs, offset by lower fixed costs as a percentage of revenues.
United States segment
U.S. revenues were $82,321 in 2023 Q1, an increase of $73,335 or 816%, compared to $8,986 in 2022 Q1, mainly as a result of the acquisitions completed in 2022, including Discovery and Altitude. The Company realized a 816% increase in activity days to 3,317 days in 2023 Q1, compared to 362 days in 2022 Q1. The average day rate decreased slightly to $24,818 per day in 2023 Q1, compared to $24,825 per day in 2022 Q1, mainly due to less high margin RSS services provided, as compared to other services provided.
Based on publicly disclosed U.S. drilling rig activity, Cathedral's U.S. market share for 2023 Q1 was 6.8% compared to under 1% in 2022 Q1.
U.S. direct costs were $66,503 in 2023 Q1, an increase of $60,508 or 1,009%, compared to $5,995 in 2022 Q1. The increase is mainly due to higher costs related to the 2022 acquisitions. As a percentage of revenues, direct costs also increased to 81% in 2023 Q1 from 67% in 2022 Q1, mainly due to higher labour, repair and maintenance, third-party equipment rental and other minor costs, offset by lower fixed costs as a percentage of revenues.
Selling, general and administrative ( " SG&A " ) expenses
| | Three months ended March 31, | | | | 2023 | 2022 | | | | | | Selling, general and administrative expenses: | | | | Direct costs | $ (14,086) | $ (3,535) | | Depreciation and amortization | (1,509) | (124) | | Share-based compensation | (775) | (91) | | Selling, general and administrative expenses | $ (16,370) | $ (3,750) |
The Company recognized SG&A expenses of $16,370 in 2023 Q1, an increase of $12,620 , compared to $3,750 in 2022 Q1. The increase is mainly due to the 2022 acquisitions. As a percentage of revenues, SG&A expenses were higher at 13% in 2023 Q1, compared to 11% in 2022 Q1. The increase is mainly due to discretionary short-term incentive program payments, which were approved and recognized in 2023 Q1, compared to no discretionary incentive payments recognized in 2022 Q1.
Depreciation and amortization and stock-based compensation recognized in SG&A were $1,509 and $775 in 2023 Q1, compared to $124 and $91 in 2022 Q1, respectively.
Technology group expenses
The Company recognized technology group expenses of $552 in 2023 Q1, an increase of $333 , compared to $219 in 2022 Q1. Technology group expenses are salaries, benefits and shop supply costs related to new product development and technology.
Gain on disposal of equipment
The Company recognized a gain on disposal of equipment of $3,044 in 2023 Q1, compared to $822 in 2022 Q1, mainly related to equipment lost-in-hole. Proceeds on lost-in-hole equipment are based on service agreements held with clients. In 2023 Q1, the Company received proceeds on disposal of equipment of $5,572 , compared to $1,233 in 2022 Q1.
Finance costs
Finance costs were $1,730 in 2023 Q1, an increase of $1,501 , compared to $229 in 2022 Q1. The higher costs are mainly due to the Company's increased debt levels from $19,949 as at March 31, 2022 to $76,807 as at March 31, 2023 coupled with an increase in interest rates between the two periods. The increased debt was in relation to the 2022 acquisitions (refer to the 'Liquidity and Capital Resources' section of this news release for more details).
In addition, the Company had $214 of finance costs in 2023 Q1 related to lease liabilities, compared to $189 in 2022 Q1.
Foreign exchange
The Company recognized a foreign exchange loss of $41 in 2023 Q1, compared to a foreign exchange gain of $310 in 2022 Q1, due to the fluctuations of the Canadian dollar relative to the U.S. dollar related to foreign currency transactions recognized in net income.
The Company's foreign operations are denominated in USD and differences due to fluctuations in the foreign currency exchange rates are recorded in other comprehensive income. As such, the Company recognized a foreign currency translation difference on foreign operations of $425 in 2023 Q1, compared to $356 in 2022 Q1.
Income tax
Income tax expense was $407 in 2023 Q1, compared to $nil in 2022 Q1. Income tax expense is booked based upon expected annualized rates using the statutory rates of 23% for Canada and the U.S.
LIQUIDITY AND CAPITAL RESOURCES
Annually, the Company's principal source of liquidity is cash generated from operations and its proceeds from equipment lost-in-hole. In addition, the Company has the ability to fund liquidity requirements through its syndicated credit facility and the issuance of additional debt and/or equity, if available.
In order to facilitate the management of its liquidity, the Company prepares an annual budget, which is updated as necessary depending on varying factors, including changes in capital structure, execution of the Company's business plan and general industry conditions. The annual budget is approved by the Board of Directors and updated forecasts are prepared as the fiscal year progresses with changes reviewed by the Board of Directors.